Strong earnings surprise for Technology in current reporting season underlines the resilience of the sector
Chief Investment Office, Hou Wey Fook 9 Feb 2022
- Spike in bond yields triggered sharp selloff in “long duration” equities in the Tech sector
- Despite the selldown, “Big Tech” displayed superior resilience relative to “Emerging Tech”
- US bond yields have historically shown strong inverse relationship with Tech sector’s valuation
- We think the bulk of the increase in bond yields (and by extension, correction in Tech) is behind us
- Weakness in Tech is an opportunity for investors to build long-term positions in secular trends
Yields concerns weigh on “long duration” equities; “Big Tech” displayed strong resilience relative to “Emerging Tech”. The hawkish Federal Reserve pivot towards policy normalisation continue to dominate market narratives as investors remain fixated on incoming inflation and wage data to gauge the extent of monetary tightening this year. On a year-to-date basis, the S&P 500 has lost 5.9% while “long duration” equities like Technology bore the brunt of the selldown, with the Nasdaq losing 10.4%.
The selling pressure on Technology is based on the assumption that rising bond yields will translate to lower present value for high growth companies with low profitability on a discounted cash flow perspective. And indeed, this train of thought is evident in the stark outperformance of “Big Tech” over “Emerging Tech” in this selldown as investors exited Technology plays with low profitability.
Everything has a price – Technology selldown hitting a trough as rising yields concerns are priced in. As Figure 1 shows, the forward valuation for Nasdaq has historically displayed close inverse relationship with bond yields.
The prevailing level of 1.92% suggests that the bulk of the increase in bond yields (and by extension, valuation contraction for Technology) has already taken place.
Resilient Tech earnings offsetting contraction in valuations. The ongoing US earnings season saw the Technology space reporting earnings surprise of 90% and this is the highest on S&P 500. The prevailing weakness in Technology presents an opportunity for investors to build long-term positions in secular trends.
